How Market Makers' Hedging Mechanics Can Turn a 5% Drop Into a 15% Crash

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A financial analysis published on DEV Community explains how market makers holding short-gamma positions are structurally forced to sell assets as prices fall, amplifying rather than absorbing market declines. When dealers sell put options to clients seeking crash protection, they inherit positions that require mechanical hedge-selling during selloffs, creating a self-reinforcing downward spiral. Using September 7, 2026 market data — with VIX at 15.3 and SKEW at the 83rd percentile — a simulation showed a 5% price shock could amplify to a roughly 15% drawdown purely through dealer hedging mechanics. The model estimates that elevated SKEW readings serve as a proxy for dealer short-gamma exposure, meaning widely watched 'fear gauges' also signal hidden mechanical selling pressure. The analysis notes that timely liquidity interventions, as seen during the 2020 market crisis, can dampen the spiral without reversing the underlying news-driven move.

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